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Genus Lifesciences Inc. v. Lannett Company, Inc.

United States District Court, N.D. California

September 3, 2019

GENUS LIFESCIENCES INC., Plaintiff,
v.
LANNETT COMPANY, INC., et al., Defendants.

          ORDER GRANTING LANNETT'S MOTION TO DISMISS IN PART AND DENYING IN PART; GRANTING FIRST DATABANK'S MOTION TO DISMISS; DENYING MOTION FOR RECONSIDERATION Re: Dkt. Nos. 55, 64, 66

          William H. Orrick United States District Judge.

         Plaintiff Genus Lifesciences Inc. (“Genus”) complains that its competitors in the market for cocaine hydrochloride nasal spray, defendants Lannett Company Inc. (“Lannett”) and Cody Laboratories, Inc. (“Cody”), Lannett's wholly owned subsidiary, falsely advertise, market and promote their product (which is not approved by the United States Food and Drug Administration) and unfairly compete with it in ways that violate the law. Genus also sues First Databank, Inc. (“First Databank”), a pharmaceutical pricing list company. On defendants' prior motions to dismiss, I found that some of Genus's claims against Lannett and Cody were plausibly stated but that none of its claims against First Databank were. Order Granting Lannett Company, Inc.'s and Cody Laboratories, Inc.'s Motion to Dismiss in Part and Denying in Part; Granting First Databank, Inc.'s Motion to Dismiss (“Order”) [Dkt. No. 53]. I dismissed each claim with leave to amend, except for Genus's contributory false advertising claim against First Databank, which I dismissed with prejudice.

         Genus has now filed an amended complaint. First Amended Complaint (“FAC”) [Dkt. No. 54]. It has also filed a motion for reconsideration related to my dismissal with prejudice of its contributory false advertising claim against First Databank. [Dkt. No. 55]. Lannett and Cody, jointly, and First Databank move to dismiss the FAC. [Dkt. Nos. 64, 66]. For the reasons stated below, Lannett and Cody's motion to dismiss is granted in part and denied in part, First Databank's motion to dismiss is granted, and Genus's motion to reconsider is denied.

         BACKGROUND

         Factual Background

         My previous Order contains a detailed factual background; I incorporate it by reference.[1]Order at 2-8. Genus manufactures an FDA approved spray under the brand name GOPRELTO® (“Goprelto”) and Lannett and Cody manufacture an unapproved spray under the brand name C-Topical® (“C-Topical”). Genus newly alleges in the FAC that it has conducted a survey of Lannett's customers, revealing that 73.4% of them falsely believe that C-Topical is FDA approved. FAC at ¶ 10. The survey also shows that 70.4% of Lannett's customers falsely believe that Lannett only sells FDA approved products. Id. Genus uses this survey evidence to bolster its claims that C-Topical's packaging and labelling, as well as Lannett's websites, are unlawfully misleading. Id. at ¶¶ 106-128. In addition, Genus alleges new survey data related to whether C-Topical's unapproved status is material to its customers. Id. at ¶¶ 153-154.

         In the FAC, Genus asserts: (i) new false advertising allegations based on several of Lannett's advertisements which describe C-Topical as a “pre-1998” drug (Id. at ¶¶ 47, 52, 67-82; Exhibits 34-37 attached to FAC [Dkt. No. 54-2); (ii) new allegations that Lannett's product catalog identifies C-Topical as generic (Id. at ¶ 105); (iii) new allegations related to other listing companies (Id. at ¶¶ 133-135); (iv) additional allegations related to First Databank's practices and communications with Genus (Id. at ¶¶ 137-149, 169-205, 218-220); and (v) additional allegations in support of its Sherman Act claims against Lannett (Id. at ¶¶ 227-238).

         Procedural Background

         In the Order, I granted Lannett and Cody's motion to dismiss in part and denied it in part. On Genus's Lanham Act claims against Lannett and Cody, I ruled: (i) Genus may plead a false advertising claim against Lannett based on the implication that C-Topical is approved using survey data that 91% of pharmacists believe that all products pharmacists dispense are FDA approved; (ii) statements in SEC filings and investor calls that C-Topical is “grandfathered” or sold under a “preliminary new drug application” cannot support a Lanham Act claim without specific allegations that they were made for the purpose of influencing customers of cocaine hydrochloride solutions to buy C-Topical, or were disseminated sufficiently to the relevant purchasing public (pharmacists, hospitals, and doctors) to constitute “advertising” or “promotion” within the pharmaceutical industry; (iii) C-Topical's indication for oral, laryngeal, or nasal topical administration is false because the FDA defines a “topical” route of administration as to a particular spot on the outer surface of the body and the mucus membranes of the oral, laryngeal, and nasal cavities are not on the outside of the body; (iv) Lannett's failure to affirmatively identify C-Topical as unapproved to third party intermediaries and customers was sufficient to state a claim as to customers based on the survey data, but not as to third party intermediaries without further supporting allegations; (v) the meta description on C-Topical's website that it was generic could support a Lanham Act claim because the landing page would not disabuse a consumer of the notion that C-Topical is generic; (vi) general statements on Lannett's website were not false but could be misleading in context combined with allegations that they conveyed the implied message that C-Topical was grandfathered or sold with FDA approval and deceived a significant portion of recipients; (vii) general statements on Cody's website related to compliance with FDA requirements could support a Lanham Act claim because Cody's website contained an affirmatively false statement that its active pharmaceutical ingredients were FDA approved; and (viii) the appearance and content of C-Topical's labeling and packaging could not support a Lanham Act claim because they did not constitute an overt false statement and Genus failed to allege that the advertising actually conveyed the implied message that C-Topical was FDA approved and deceived a significant portion of recipients. Order at 9-20.

         Turning to Genus's Sherman Act claims against Lannett, I found that that Genus failed to state a monopolization claim against Lannett based on false advertising for two reasons. Id. at 22- 23. First, Genus did not allege over what time period Lannett's meta description was online, how long the challenged statements were on Cody's website, or how long Lannett described C-Topical as having a “topical” route of administration. Id. Genus also failed to allege why these statements were not readily susceptible to neutralization by rivals. Id. Next, Genus's monopolization claim based on Lannett's listing practices failed because Genus did not allege that it had been substantially foreclosed from the entire cocaine hydrochloride market. Id. at 23-24. Finally, Genus's state law claims against Lannett under California's false advertising and unfair competition laws survived because they were premised on the same allegations of false advertising as Genus's Lanham Act claims. Id. at 25.

         I granted First Databank's motion to dismiss on several grounds. Genus's false advertising claim failed because Genus was unable to allege that First Databank was anything more than a reference database. Id. at 27-30. First Databank's listing of C-Topical did not constitute commercial speech since it did not propose a commercial transaction between First Databank and consumers of cocaine hydrochloride. Id. Genus failed to allege that Lannett and First Databank had a quid-pro-quo relationship based on C-Topical's sales. Id. Its contributory false advertising claim against First Databank failed under the tests in Duty Free Ams., Inc. v. Estée Lauder Cos., 797 F.3d 1248, 1275 (11th Cir. 2015) and ADT Sec. Servs., Inc. v. Sec. One Int'l, Inc., No. 11-cv-05149-YGR, 2012 WL 4068632, at *1 (N.D. Cal. Sept. 14, 2012). For the Duty-Free test, Genus did not allege that First Databank knowingly induced or caused Lannett's conduct or materially participated in it. Id. at 30-33. Under the ADT Services test, Genus did not allege that First Databank either induced the primary Lanham Act violation by Lannett, or that First Databank continued to supply an infringing product to Lannett. The claims I dismissed against Lannett, Cody and First Databank were with leave to amend, except for Genus's contributory false advertising claim against First Databank, which was dismissed with prejudice. Id. at 33.

         LEGAL STANDARD

         Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible when the plaintiff pleads facts that “allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted). There must be “more than a sheer possibility that a defendant has acted unlawfully.” Id. While courts do not require “heightened fact pleading of specifics, ” a plaintiff must allege facts sufficient to “raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555, 570.

         In deciding whether the plaintiff has stated a claim upon which relief can be granted, the court accepts the plaintiff's allegations as true and draws all reasonable inferences in favor of the plaintiff. Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, the court is not required to accept as true “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008). If the court dismisses the complaint, it “should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000).

         DISCUSSION

         I. LANNETT AND CODY'S MOTION TO DISMISS

         A. The Lanham Act Claims

         1. Lanham Act Claims and FDA Approval

         The Lanham Act creates a private right of action for competitors to bring claims for false or misleading advertising, even if the challenged products are regulated by the FDCA. POM Wonderful LLC v. Coca-Cola Co., 134 S.Ct. 2228, 2233 (2014). “Courts can evaluate Lanham Act claims that do not require specialized knowledge or interpretation of the FDCA's requirements.” Belcher Pharm., LLC v. Hospira, Inc., No. 17-cv2353, 2018 WL 4643292, at *4 (M.D. Fla. Apr. 9, 2018). “For example, courts can review a claim that a competitor falsely represented its product as FDA approved.” Id. (citing Innovative Health Sols., Inc. v. DyAnsys, Inc., No. 14-cv-05207-SI, 2015 WL 2398931, at *8 (N.D. Cal. May 19, 2015)). “And claims that involve whether a product's advertising misleads consumers also fall within a court's jurisdiction.” Id. (citing Church & Dwight Co. Inc. v. SPD Swiss Precision Diagnostics, 104 F.Supp.3d 348, 362 (S.D.N.Y. 2015).

         To state a false advertising claim under the Lanham Act, a plaintiff must allege: “(1) a false statement of fact by the defendant in a commercial advertisement about its own or another's product; (2) the statement actually deceived or has the tendency to deceive a substantial segment of its audience; (3) the deception is material, in that it is likely to influence the purchasing decision; (4) the defendant caused its false statement to enter interstate commerce; and (5) the plaintiff has been or is likely to be injured as a result of the false statement, either by direct diversion of sales from itself to defendant or by lessening of the goodwill associated with its products.” Wells Fargo & Co. v. ABD Ins. & Fin. Servs., Inc., 758 F.3d 1069, 1071-72 (9th Cir. 2014) (citing Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, 1139 (9th Cir. 1997)). Plaintiffs must allege all five elements of the test in order to state a false advertising claim. Id. “When the alleged representation is not an overt false statement, but merely misleading in context, the evidentiary showing required to sustain a Lanham claim is higher” and “proof that the advertising actually conveyed the implied message and thereby deceived a significant portion of the recipients becomes critical.” JHP Pharm., LLC v. Hospira, Inc., 52 F.Supp.3d 992, 1002-03 (C.D. Cal. 2014) (citing William H. Morris Co. v. Grp. W, Inc., 66 F.3d 255, 258 (9th Cir. 1995)).

         Courts have found that when a Lanham Act claim is based on the mere implication that a drug was approved by the FDA, a plaintiff must also plead other facts to show that customers were actually confused. Par Sterile Prod., LLC v. Fresenius Kabi USA LLC, No. 14-cv3349, 2015 WL 1263041, at *4 (N.D. Ill. Mar. 17, 2015). In Par, the court found the following additional allegations to state a Lanham Act claim: (i) that buyers believe all prescribed drugs identified on the Price Lists are FDA approved and (ii) that in some surveys 91% of pharmacists are actually confused about whether all drugs that appear on industry price lists are approved. Id. at *4.

         2. Statements Made in SEC Filings and Investor Calls

         In the Order, I held that statements made by Lannett in its SEC filings or by its directors during investment calls stating that C-Topical was “grandfathered” or sold under a “preliminary new drug application” were not actionable because they were not accompanied by specific allegations that they were made for the purpose of influencing the customers of cocaine hydrochloride solutions to buy C-Topical, or were disseminated sufficiently to the relevant purchasing public (pharmacists, hospitals, and doctors) to constitute “advertising” or “promotion” within the pharmaceutical industry. Order at 12-14 (citing Rice v. Fox Broadcasting Co., 330 F.3d at 1170, 1181 (9th Cir. 2003)). Lannett moves again to dismiss Genus's attempted revival of its claims based on SEC filings and statements made on investor calls. Defendant Lannett Co. Inc. & Cody Laboratories, Inc.'s Notice of Motion, Motion to Dismiss the First Amended Complaint (“Lan. MTD”) at 7-8 [Dkt. No. 64]. It argues that Genus's conclusory allegations that these communications constitute “commercial statements” or were “advertised to customers” do not change the non-commercial nature of these statements. Id. (citing FAC at ¶¶ 55, 64).

         Genus contends that its claim is not based on the statements in SEC filings or investor calls alone. Instead, it attempts to bring those claims in combination with the advertisements describing C-Topical as a “pre-1938” product (the “pre-1938 ads”) and that together, this renders the statements contained in the SEC filings and investor calls actionable. Plaintiff Genus Lifesciences, Inc.'s Brief in Opposition to Lannett Company, Inc.'s and Cody Laboratories, Inc.'s Motion to Dismiss First Amended Complaint (“Lan. Oppo.”) at 6-9 [Dkt. No. 68]. According to Genus, “this is all one claim” because it must be read in the context of the overall complaint. Id. at 6.

         The problem with Genus's argument is that Lanham Act claims must be evaluated on a statement-by-statement basis. Johnson & Johnson Vision Care, Inc. v. 1-800 Contacts, Inc., 299 F.3d 1242, 1247-48 (11th Cir. 2002). In Johnson & Johnson, the Third Circuit reviewed a district court decision that reviewed several advertisements together, rather than on an ad-by-ad basis. Id. The court ruled that although “a court must analyze the message conveyed in full context, ” courts “may not assume context” and the district court erroneously assumed that consumers would be exposed to every advertisement in the campaign. Id. (internal citations and quotation marks omitted).

         Here, Genus improperly asks me to assume context. There is no indication that consumers would have observed the SEC filings and statements in the investor calls along with the pre-1938 ads. It would be improper to assume that they did without specific supporting factual assertions.[2]

         As I held in the Order, Genus has failed to state a false advertising claim based on Lannett's statements in SEC filings or investor calls because it fails to bring specific allegations that they were made for the purpose of influencing customers or were disseminated sufficiently to the relevant purchasing public. It does not follow that just because consumers might have seen the pre-1938 ads, they necessarily would also have seen the SEC filings or listened to the investor calls. The pre-1938 ads will be considered separately from the SEC filings and investor calls. Lannett's motion to dismiss Genus's Lanham Act claims based on SEC filings and investor calls is granted.

         3. The Pre-1938 Ads

         As discussed above, Genus attached four new C-Topical advertisements by Lannett to the FAC. FAC at ¶¶ 68-76; Exhibits 34-37. All four describe C-Topical as a pre-1938 drug (Exhibits 34-37) and three also state that “A New Drug Application (NDA), with clinical study data has been submitted to the FDA” (Exhibits 35-37). These advertisements appeared on www.lannettdirect.com (Exhibit 34) and on www.entjournal.com (Exhibits 35-37).

         Lannett argues that these advertisements are not actionable because Genus has not plausibly alleged that customers were misled by the statements or that “pre-1938” status was material to customers. Lan. MTD at 12-13. It contends that Genus makes an unsupported inferential leap to claim that purchasers equate “pre-1938” with “grandfathered, ” or “FDA authorization.” Id. To plead materiality, Lannett claims that Genus must plausibly allege that the statement “pre-1938” is likely to influence purchasing decisions and its allegations that FDA approval status is material do not cover these statements. Id. It points out that the ad on www.lannettdirect.com also states that “Cocaine HCL is a pre-1938 drug that has not been approved by the FDA” and the ENT Journal advertisements state that Cocaine HCL “has not been proven safe and effective by the FDA.” Id. It does not address the statements related to submission of an NDA and clinical study data to the FDA.

         In opposition to Lannett's argument that customers would not equate “pre-1938” with “grandfathered, ” Genus asserts that: (i) C-Topical's customers would know that 1938 is the year Congress passed the landmark Federal Food, Drug, and Cosmetic Act; (ii) Lannett equates the two and repeatedly used the phrase “1938 ‘grandfather clause'” in its citizen petition to the FDA; (iii) the FDA used the same language to deny Lannett's petition; (iv) if Lannett's customers would not understand what pre-1938 means, Lannett would not use the phrase; and (v) Genus specifically alleged that “pre-1938”means the drug is “grandfathered” and FDA authorized. Lan. Oppo. at 7 n.8. These arguments apply to the claim related to submission of an NDA and clinical data as well. Id. at 9.

         I agree that Genus has sufficiently alleged that people in the market for a prescription drug such as C-Topical would know what “pre-1938” means in this context or what the implication of submitting clinical data pursuant to an NDA would be. It has sufficiently alleged that the only reason Lannett would advertise C-Topical as “pre-1938, ” or that they had submitted an NDA, would be to convince consumers that C-Topical is an unapproved “grandfathered” drug product or otherwise authorized by FDA.[3]

         Genus counters that Lannett's materiality argument erroneously conflates FDA approval with FDA authorization. Id. It states that a “pre-1938” drug, or one that has a submitted NDA, is FDA authorized, not FDA approved. Id. at 7-9. Thus, Genus claims, even where Lannett admits it has no FDA approval for C-Topical, it still falsely suggests that C-Topical is otherwise authorized. Id. And Genus asserts that it has adequately pleaded that customers would care whether C-Topical was sold with FDA authorization because it has alleged that the FDA approval status of a prescription drug is material to customers since approved drugs provide customers assurance concerning the quality of the product not afforded to unapproved prescription drugs. Id. It cites to its survey evidence showing that the majority of Lannett's customers would not buy C-Topical if they knew it was unapproved. Id. Therefore, according to Genus, because customers care whether a drug is FDA-approved, they implicitly care whether the FDA authorizes a manufacturer to sell a drug. Id.

         I agree with Genus's argument up until the final leap of logic. Genus has adequately alleged that customers care about FDA approval. But I am also persuaded by Lannett's argument on the difference between approval and authorization. The complaint does not allege that customers care about FDA authorization and Genus's argument that they must implicitly care about it is a bridge too far. Genus has not actually pleaded that FDA authorization, versus approval, is material to customers of cocaine hydrochloride. As a result, it has not stated a claim based on the pre-1938 ads. Its claims based on these ads are dismissed with leave to amend.

         4. C-Topical's Labeling and Packaging

         In the Order, I held that Genus had failed to state a claim based on the appearance and content of C-Topical's labeling and packaging and the allegedly misleading similarities between it and the labeling and packaging of an FDA approved drug. Order at 19-20. I held that because the alleged representation was not an overt false statement, but was merely misleading in context, Genus would have to allege that it actually conveyed the implied message that C-Topical was FDA approved and deceived a significant portion of recipients. Id. In response to that guidance, Genus conducted a survey of Lannett's customers; allegedly 73.4% of them falsely believed that C-Topical was FDA approved after reviewing its packaging. AC at ¶¶ 112, 114.

         In its motion to dismiss, Lannett claims that this additional factual allegation is still insufficient because Genus does not allege that any of the information on the label or package is false. Lan. MTD at 8-10. According to Lannett, while the Lanham Act forbids misleading as well as false claims, “misleading” does not include “factual propositions that are susceptible to misunderstanding.” Id. It asks me to disregard Genus's survey allegations because a survey cannot be used to ascribe a “misleading” meaning to an otherwise accurate statement. Id. It claims that it is required by federal law to include the various statements on the packaging and label and that under Genus's ...


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